How to Finance Your Business by Private Placement

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The one constant in the life of your small business will be the need for a cash infusion to jumpstart sales, expand into new markets, or continue to sustain growth. While there are a multitude of financing sources of funding available to small business owners, each source has its limitations and requirements.

For instance, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability.

Private placements are an attractive alternative for growing companies.

What is Private Placement?

Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement.

As good as it sounds, the majority of private placement dollars came from pension funds, investment pools, banks and insurance companies. However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public.

Benefits of Private Placement

  • High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.
  • Investors are more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.
  • Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
  • Quicker form of raising money than usual venture capital markets.

    Who is a Candidate for Private Stock Offerings?

    The ideal small business candidate is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

    Where to Find Private Placements?

    The money from private placements will come from accredited investors defined by the SEC Rule 501 under Regulation D as:

    • An individual earning 200k per year
    • A household with income of $300K per year or having a net worth over $1M
    • Venture funds, some banks and other institutions

    Connect with bankers, attorneys, and accountants who can network your small business with a private investor.

    What is Required for Private Placements?

    • A sound business plan
    • A private placement memorandum (PPM) disclosing the full facts of the investment and business
    • A law firm or lawyer experienced in private placements.

    With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

    Edited by Alyssa Gregory